August 31, 2000 Heard on the StreetWade Cook and Regulators Near Complaint Settlement

By JEFF D. OPDYKE Staff Reporter of THE WALL STREET JOURNAL

SEATTLE -- Cabbie-turned-investment-guru Wade Cook built one of the nation's largest financial-seminar firms by preaching a gospel of easy profits. Now, state and federal regulators are out to amend his sermon and return some of his firm's own profits to disgruntled customers.

The Federal Trade Commission along with attorneys general and securities regulators from 13 states stretching from Alaska to North Carolina are close to wrapping up separate settlement pacts with Mr. Cook's Wade Cook Financial Corp. to address widespread customer complaints, according to people close to the negotiations. The pacts highlight concerns of regulators that Mr. Cook has aggressively pitched his trading strategies as capable of delivering triple-digit annual returns, even though one regulator's analysis of Mr. Cook's own trading accounts from 1995 through 1998 shows meager results, at best.

Mr. Cook has largely spread his strategies to individual investors, from teenagers to retirees, through seminars in hotel ballrooms across the country -- sometimes at the rate of five a day. According to federal filings, in 1998 -- the company's peak year with $118.2 million in total revenue -- Mr. Cook's "Team Wall Street" hosted 3,737 seminars in 379 cities.

The people close to the negotiations say the FTC pact will include provisions for the financial orator to reimburse fees of as much as $5,695 to certain of the tens of thousands of former students who paid to attend his two-day investment seminars, known as Wall Street Workshops, and who lost money from the strategies, among other things. Depending on how many former students seek refunds and qualify, Mr. Cook and his company could be subject to tens of millions of dollars of reimbursements, the people say.

H. Troy Romero, outside general counsel for Wade Cook Financial, confirms thatsettlement talks involving reimbursements are in the works, although he declines to discuss the amount the company could end up paying. He says the pacts will have "nothing to do with content or the strategies we teach" and that the company is doing this "for the benefit of shareholders and students. We'll have a fresh start moving forward."

Though the FTC settlement has been hammered out between Mr. Cook, his company and the agency, it hasn't been signed and remains subject to approval by the agency's commissioners, say the people involved. Mr. Cook and the states are still haggling over small issues, and that pact could yet fall apart, the people say.

Under terms being discussed in the states' settlement, Wade Cook Financial would pay $400,000 to the states to cover part of the costs of the investigations, the people say. Mr. Romero says any such payment would be designated "consumer education."

Both pacts are expected to include some restrictions on Mr. Cook's ability to promote his strategies, the people say. In the past, his advertisements have included claims that investors could "double your money every 2 1/2 to four months" by following his collection of stock and options trading strategies, which he peddles not just in seminars, but in numerous books, audio and video tapes and infomercials. One workshop brochure says followers "learn how to consistently earn 15% to 40% monthly returns (300% annually)."

The FTC settlement would require that, if Mr. Cook indicates expected rates of return from his strategies at his introductory seminars (those usually priced at $12 to $33 and geared toward selling people on his more expensive investment program), then he must provide his exact returns over the past three years using the techniques he pitches, the people say.

Mr. Romero says the rates of return the company has advertised in the past were based on annualizing what a "person could earn on a single transaction." He says the advertising has changed and now includes disclaimers that advise of the risks involved.

For investors in Wade Cook Financial itself, an Over the Counter Bulletin Board stock, the pacts could prove costly. Already, the regulatory scrutiny has pinched business. Seminar attendance is down, and in the first six months of the year, revenue from continuing operations slumped 33% to $34.9 million, while net losses for the six months tallied $674,000, compared with year-ago profit of $1.12 million. The stock has done little all year, bouncing around 50 cents a share, far off the $5.30 high it hit in late 1997. As of April 30, Mr. Cook and his wife owned 41.35 million shares, or 64.5%, of the company.

As of June 30, the firm had just $6.3 million in cash, marketable securities and other investments, according to federal filings. People familiar with the FTC settlement say Mr. Cook has pledged to cover the cost of the refunds personally, if necessary.

In a federal filing last month, the company referred to "various government investigations and legal proceedings" that had created "adverse publicity." It added, "were the company found to be liable in certain of these proceedings, the liability could be material," while any requirements by government agencies to pay material penalties or to refund money paid to seminar attendees "could materially adversely affect the company's financial condition or results of operations."

Mr. Cook's basic "meter drop" philosophy of investing stems from his experience driving taxis, specifically cab No. 22 in his hometown of Tacoma, Wash. He deduced that since it cost customers $2 just to step into the taxi -- the meter drop -- it was more profitable to traffic in a large number of short, low-priced hops than wait for pricier, long-haul fares. On Wall Street, he reasoned similarly, quick-hit trading, rather than buy-and-hold investing, was a more lucrative road to riches. His stock and options strategies, often based on borrowing money, are so "simple" that "even teenagers are using them to earn in excess of 20% per month," according to one of the company's older brochures.

But Mr. Cook's own returns are substantially tamer, maintain regulators in the Securities Division of Washington State's Department of Financial Institutions, which has spent more than four years dissecting Mr. Cook's operations. The agency reviewed 82 separate accounts in which Mr. Cook traded his or the company's money between 1995 and 1998 and determined that his annual returns ranged from 3.3% to negative 5.3%, says Deb Bortner, director of the Washington agency.

The regulators' concerns also include the alleged posting of bogus options trades on Mr. Cook's Web site, the Wealth Information Network, to which access is available for $1,695 a year and is promoted as a window on Mr. Cook's personal trading. In a November 1999 letter from the Chicago Board Options Exchange to the Washington regulators, the exchange states that some of the trades Mr. Cook advertised "could not be executed as illustrated" because the options contracts he specified never traded at the prices he detailed, according to the letter.

Mr. Romero, the Wade Cook general counsel, says the regulators' analysis doesn't include a $3.7 million gain, or 129%, that the company reported in federal filings for its market trades in 1999. (For the six months through June 30, filings show the company lost $1.4 million on such trades.) As for the CBOE letter, Mr. Romero says he can't comment on it because he hasn't seen it. However, he says some of the trades that Wade Cook advertised before 1997 may have been "hypothetical." The trades now "are all actual trades," he says.

States began probing the company as complaints mounted from unsophisticated investors who said they had "been misled," says Jim Haney, spokesman for the Wisconsin Attorney General's office, where complaints prompted the state to join settlement talks late last year.

Two states, Texas and California, have civil suits pending against Mr. Cook in state courts alleging consumer fraud. Those states are involved in the negotiations and it is unclear whether the suits would be dropped if a pact is reached, the knowledgeable people say. Mr. Cook has steadfastly denied the consumer-fraud charges. Washington state has had a lawsuit in the works for months, but has refrained from filing it while negotiations continued, Ms. Bortner says.

Mr. Cook's personal wealth ballooned along with his popularity. His combined pay surpassed $22.2 million between 1997 and 1999, according to the federal filings. That was nearly triple the company's combined earnings of $7.5 million during the same period.

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